MAUMEE, OHIO, U.S. — A combination of low value in grain and ample grain stocks adversely affected The Andersons third-quarter earnings.
The Andersons sustained a loss of $2.1 million in the third quarter ended Sept. 30, which compared with income of $2.5 million, equal to 9¢ per share on the common stock, in the same period a year ago. Revenues fell 18% to $686 million from $837 million.
“Our third-quarter results fell short of our third quarter 2017 results but the significant reason for that shortfall is a timing difference caused by a lower basis values in the grain business, driven by abundant grain stocks and near-record corn and soybean yields,” Patrick E. Bowe, chief executive officer of The Andersons, said during an earnings call with analysts on Nov. 6. “The other parts of the grain business, namely our risk management, food ingredients and affiliated companies, all recorded a better year-over-year results. That was especially the case for Lansing Trade Group, which we’re in the process of acquiring. We’re very excited about the prospect of uniting our two companies.”
The Grain Group generated a pretax loss of $8.6 million in the quarter, down $11.2 million from its third quarter 2017 results.
Base grain pretax income fell by $14.3 million in the third quarter compared with 2017 results, primarily reflecting the impact of the significant decrease in corn and soybean basis levels. This result was caused primarily by near-record corn and soybean yields and reduced exports resulting from trade tensions with China.
The Andersons noted the situation was compounded by significant movement of grain from on-farm storage that occurred later than usual as farmers carried corn further into the summer than recent years. These low basis levels have provided the group an opportunity to fill storage capacity at attractive basis levels.
In addition to the impact of decreasing corn and bean basis levels, the group earned comparatively less income on its wheat positions. The market appreciated considerably more in the third quarter last year than it did this year, the company said.
“The Grain Group’s performance through the fall harvest gives us confidence and strong earnings for the fourth quarter of 2018 and moving into 2019,” Bowe said. “We expect the full year 2018 earnings for our base grain business will be similar to its adjusted 2017 pretax income and should have strong momentum heading into 2019.”
Bowe said he is confident that the third-quarter result is a timing difference that will reverse substantially in the fourth quarter.
“Major factors include stronger corn and soybean basis potential as well as wider merchandising margins on the bushels we handle,” Bowe said. “While wheat earnings potential is still historically favorable, earnings from grain ownership has become more balanced among all three grains. We also think the fourth-quarter results from risk management and food ingredients will meet or beat those of 2017. Lansing and Thompsons each continue to improve their performance and build momentum.
“Speaking of Lansing, I can report that preclose planning and integration work has ramped up and is going quite well. The reaction to the news of this pending acquisition by our customers and employees has been very positive. We expect to close the transaction in January. Bottom line is that we view the operating environment going into 2019 as very good for the Grain Group.”
Despite an overall loss, The Andersons Ethanol Group generated a pretax income of $9.1 million in the third quarter, up from $6.1 million pretax income in the same period in 2017.
“Ethanol’s results improved by $3 million, headlined by higher sales volumes, timely hedging and better DDG values,” said Brian A. Valentine, senior vice-president and chief financial officer. “Third-quarter 2017 results included an unusual $1.5 million expense.”
The third quarter for the Ethanol Group presented strong results but The Andersons is seeing a decline in margins.
“The Ethanol Group performed very well in the third quarter, but margins have declined in the past couple of months and don’t show signs of improving anytime soon,” Bowe said. “The group had comparatively less of its margins hedged going into the fourth quarter than it did entering the third quarter. Despite high export demand, rising production and moderating seasonal grinding demand, there is concern about margins for the balance of 2018 and into 2019. More specifically, we expect our fourth-quarter results to be somewhat lower than the fourth quarter of last year.”
One note of change in the Ethanol Group is progress on construction of the group’s ELEMENT facility has been slowed by about 60 days due to near-record rainfall at the site. The project remains on budget, and while production is expected to commence in mid-year 2019, the realization of the benefits of the plant’s premium products may be delayed until early 2020. The company notes this delay could impact the Ethanol Groups 2019 results.
Despite the challenges that market provides the company is positive about the upcoming year.
“In closing, we’re very optimistic about the year ahead for our existing grain business, and that excitement is magnified by the prospect of integrating Lansing Trade Group in early 2019,” Bowe said. “Our view of next year for the ethanol business is cautious, given near-term market pressures. We see some signs of improvement in the Plant Nutrient Group, but specialty margins will take time to recover. We think the Rail Group’s results will be improved over those of 2018. After spending the last three years improving productivity, reducing cost and trimming underperforming assets, we’re excited to be in the growth mode.
“Combining Lansing Trade Group with our Grain Group will substantially grow our revenues, gross profit, pretax income and EBITDA. Along with the ELEMENT project in the Ethanol Group, this acquisition is another big step forward towards achieving our goal of generating $300 million of EBITDA by 2020.”